It’s hard enough to make a choice about your car – red or blue? Honda or Toyota? Brand new or used? – before you even consider the financing, but that is an integral piece of the equation you cannot ignore. Some people want to keep a car until its last gasp, while others prefer to trade in their cars often for newer, more reliable models. Regardless of what your approach is, you will have to answer the question: should I buy, lease, or pay cash for my car?
According to this article from FMG suite, about one third of car buyers choose to lease their car, while most buy cars on a finance plan. The right option for you depends on a few factors, including your financial situation and your preferences.
The upside of paying for a car outright is both the simplicity and the lack of short or long-term debt. There are no monthly payments, and you can drive out of the lot debt-free. One downside, however, is that vehicles tend to depreciate fairly quickly. In addition, the cash you used to buy such a high-cost asset could be used towards investments, with a monthly payment simply being rolled into your expenses.
If you choose instead to finance your car, buying it with monthly payments, you will generally pay down a small amount of the car’s value. The bank owns the car as you make monthly payments, which include both principal and interest. The amount of the payment and interest percentages depend on the market and the lender, as well as the make and model of the car and a variety of other factors.
In Hampton Roads, as in many other parts of the country, new and used car sales have spiked over the last year during the COVID-19 pandemic. The chart below shows a historical comparison of car sales in Newport News and the surrounding area over the last decade.
Source: https://www.hrpdcva.gov/departments/economics/hampton-roads-economic-monthly/
One option for those who prefer to have a new car every few years is to lease instead of buy. “Leasing a car is like renting an apartment. You pay a monthly fee to use the car for a specific amount of time, usually two to three years. Monthly payments are typically lower than when you finance, since you are paying for the depreciation on the car while you drive it.” (FMG Suite) Sometimes, however, there are certain stipulations that come with leasing cars, such as the number of miles you can drive while you lease it. You could incur penalties if you break the terms of the lease, so be careful to read the fine print before you sign.
Whether you choose to pay outright for your car, incur debt for a time, or lease a vehicle, it’s important to work with someone you trust to create the best strategy for your budget and lifestyle. If you have any questions, feel free to call or contact me as you make a big decision that has both short and long-term impacts on your financial situation.